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Labor Law – Employee Profit Sharing

Written By: Pablo Saenz, Esq.

Cacheaux Cavazos & Newton

Mexico City, Mexico

Employee profit sharing is a topic of great importance. Article 123 section IX of the Constitution of the United Mexican States stipulates that employees shall have a right to share in company profits (10% of taxable profits in accordance with the terms of the Income Tax Law). The Federal Labor Law is the law regulating article 123 above, which provides for employee profit sharing.

Generally speaking, all employers, whether individuals or entities, with salaried employees, have the obligation to make this payment. Only the following are exempt from such profit sharing obligation: (i) newly formed companies, during the first year of operation, It is important to note that merger, transfer or change of the company name does not result in a newly formed entity; (ii) newly formed companies dedicated to the manufacture of a new product during the first two years of operation. The determination of the novelty of a product must comply with the laws for the promotion of new industries. ; (iii) companies in the mining or extractive industry, newly formed, during the period of exploration; (iv) private charity institutions recognized by law, using privately owned resources to carry out acts for humanitarian assistance purposes, not for profit and which do not designate individual beneficiaries; (v) the Mexican Social Security Institute and public decentralized institutions with cultural, assistance or beneficial purposes; and (vi) companies with capital of less than that established by the Secretary of Labor and Welfare by industry sectors, with prior consultation with the Secretary of the Economy.

All employees providing services to a company have the right to profit sharing in accordance with the following: a).- Permanent employees, regardless of the number of days worked during the company’s fiscal year; b).- Temporary employees, once they have worked at least 60 days continuously or discontinuously during the fiscal year; and c).- Former employees, as long as their right has not lapsed.

Persons excluded from profit sharing: (i) directors, administrators and general managers; (ii) individuals who are owners or co-owners of companies; (iii) technical professionals, craftsmen and others who provide their services for a fee without the existence of an employee relationship; and (iv) temporary employment, when the individual works fewer than 60 days during the company’s fiscal year. Profit sharing is not computed as part of salary for purposes of severance payments that must be paid to employees.

The employer and its employees must designate representatives to form part of a Mixed Commission for Profit Sharing Distribution. Such commission is to be in charge of performing calculations to determine the share of profits that will correspond to each employee. Once this commission establishes the amount that will be subject to a profit sharing distribution, it will be divided into equal parts. The first will be shared in equal parts by employees, taking into consideration the number of days worked by each employee during the year, regardless of salary, and the second part will be distributed in proportion to the amount of salary received by each employee during the year, meaning that the corresponding share per employee will depend on their salary. Once such process has concluded, the results of the profit sharing distribution must be published at least fifteen days prior to payment on a list that must be posted in a place that is visible to all company personnel.

The distribution of profits among employees should be carried out within sixty days following the date on which the annual tax must be paid (at the latest, by May 30th of the corresponding year), even when an objection by the employees is in progress.

The amount of unclaimed profits during the year of distribution will be added to the distributable amount for the next year. Finally, it is important to note that the right of employees to participate in profit sharing does not include the ability to intervene in the management or administration of the employer.